Unfortunately, we have been around long enough to have seen people make some serious financial mistakes.  Mistakes that can have life-altering consequences. 

There have been a number of occasions whereby, we are pulled in after-the-fact in an effort to help take corrective action and make the most of a bad situation.  Helping people knock the dust off and pick up the pieces is not fun.  Seeing the pain that people have to endure simply because they made a financial mistake is really hard!

If there is a bright spot in going through these difficult times with clients, it is that our current and future clients get to benefit from the knowledge we gain from having helped clients during these setbacks. 

After all, the advice we give to current and future clients is influenced by the experiences we’ve had throughout our advisory career, which spans across a number of economic cycles!

To that end, we would like to provide you with some insight into the more common categories of mistakes we’ve seen.  Our hope is that you might avoid them and understand why we give the advice we do.

Under Estimating the Power of Leverage

Anytime borrowing money is involved with making an investment, there are additional risks to consider.  Using leverage can substantially magnify both investment gains and losses. 

We have found that when it comes to risk taking people normally over-estimate the possibility of successful outcomes and underestimate the possibility of negative outcomes.  This is especially true when investing in real estate, which almost always involves leverage.

Borrowing money to invest in an investment property, or vacation home sounds great on the surface.  However, many unexpected things can go wrong and we’ve seen it all!  Tenant problems, lawsuits, divorces and a host of other unforeseen events can greatly impact investment returns on real estate. 

Of course there can be times when borrowing money to invest in real estate can be beneficial and appropriate.  However, we always suggest being cautious and carefully evaluating negative possibilities.

Owning a Concentrated Stock Position

On too many occasions we have seen people lose an enormous amount of their net worth because of significant exposure to one stock– often times the company where they work. 

Believe it or not, huge multinational companies face major setbacks and at times are completely wiped out.  In fact, the average individual stock fluctuates by about 50% on a year-by-year basis (just look at the 52 week highs and lows).

There are countless examples of significant declines to many companies over the last 10 to 20 years.  Citigroup, GE, Nortel, AIG, WorldCom and BP are just a few you may remember. 

Don’t let capital gains taxes (that are at historically low rates) stop you from eliminating or reducing company-specific risk from your portfolio!  A significant decline can have an enormous negative impact for you and your family!

Providing Excessive Support to Others

This one is really hard.  Parents, children and other family members who you love sometimes fall on hard times or go through slumps.  As compassionate people, it’s hard to say no when it comes to helping family members. 

It may seem harmless to provide some financial support, but sometimes providing one-time assistance can turn into ongoing dependence that can impact your financial plan.

When it comes to supporting others, it is important to understand the limits of how much you are able to help others financially and to say no when the situation warrants.